Financial troubles are common for many people. Running up credit card debt, divorce, medical debt unemployment, among other reasons, can lead to a strapped bank account unable to pay back debts that just won’t go away.
You don’t have to be on the edge of financial ruin before filing for consumer bankruptcy, but if you choose to file for Chapter 7, you must pass a means test that measures your household income to the average for your state. If your income doesn’t exceed the median income threshold for your household size, you have a good chance of being approved.
Chapter 7, or “liquidation” bankruptcy, is a good option for individuals and families that don’t have much, if any, disposable income to put toward a repayment plan. Instead, people who qualify for Chapter 7, have their non-exempts assets and valuable property, like vehicles, investments, valuable collections, and jewelry, sold to pay off their debt.
Chapter 13 is quite different. Those with an income that exceeds the median threshold, and have some disposable income, would be best served to consider Chapter 13, or “repayment” bankruptcy. If accepted for Chapter 13, you would agree to a three-to-five-year repayment plan to pay off your debts at a possible lowered total amount.
But what about your credit score? People can get scared off by bankruptcy, thinking that their credit score will pay a tragic price. While your score will take a hit and affect your creditworthiness for several years, relief will occur, bankruptcy will be removed from your report, and your score will begin to steadily increase (if you make smart financial decisions).
Credit and Bankruptcy
Your credit report will be impacted by Chapter 7 bankruptcy for up to 10 years. Also, among the two options, Chapter 7 or Chapter 13, those who choose Chapter 7 bankruptcy may be viewed in a more negative light by creditors because they are not repaying their debt, only selling their assets to pay off what they can.
Chapter 13 bankruptcy will last on your report for up to seven years. The lower amount of years is due to you coming through on your payments, which raises your creditworthiness to lenders.
Reviving your credit score
Even though creditors will see your bankruptcy filing on your report for up to ten years, after four or five years, your chances of being approved for credit increases. If you are approved, the interest rates may l be high, and your credit limit may be low, but it’s a chance to build new and financially responsible credit habits.
If you want to venture into the credit game again, consider a secured credit card. What differentiates a secured credit card, is that a cash deposit from the borrower backs them. This deposit acts as collateral, like a security blanket for the card issuer, should you default on your payments.
Bankruptcy is just one step
Bankruptcy is not a cure-all for your financial future. You must learn to make smart money decisions to avoid falling into the same trap. The universal tool to manage your debt and income properly is to set a budget. This point may seem obvious, but many people either set a budget and don’t follow it, or simply don’t worry about budgeting. Sometimes life events occur that are out of our control and lead to financial troubles, but controlling what you can control when you can control it will only benefit you in the long run.